Iron ore: from rust to riches

New Delhi, Feb. 24 -- Iron ore prices are a few dollars short of the $100/tonne-mark, with the price of 62% iron ore grade at Qingdao port in China closing at $94/tonne on 22 February. Prices are now a fifth higher than at the start of 2017, and 83% higher than a year ago.
January's World Steel Association steel output data gives an idea why. Global crude steel production rose by 7% over a year ago, a little short of China's growth of 7.4%. Global steel output rose by 1.7% sequentially.
China's growth in steel output does not square with the country's stated intention to lower unviable and polluting steel capacity. That was partly to quell global concern over its surplus steel output flooding global markets. The overall numbers don't indicate any slowdown in its output.
Not just China, all major steel-producing regions reported an increase in output. India's output was up by 11.5% in January, according to government data.
What's more, while output is increasing, steel prices continue to remain firm too, partly because rising raw material prices support higher steel prices. Iron ore and hard coking coal prices have risen and energy costs also increase as crude oil prices have firmed up. There may be a lag with raw material prices increasing first but as long as they hold up, steel prices tend to move up.
How does this affect Indian producers? Iron ore producers such as NMDC Ltd and Vedanta Ltd have it good, as their output has been rising too.
Vedanta said it has exhausted its annual iron ore mining cap for Goa and Karnataka in January and it has got an additional three million tonnes allocation in Goa. The increase in international iron ore prices augurs well for its iron ore business, although the grades may not be the same as mentioned above.
NMDC takes a more gradual approach to increasing domestic iron ore prices. Even then, it has benefited from rising prices. In the December quarter, of the sequential growth in sales of Rs763 crore, volumes contributed to 46% and increase in prices to 41%.
A continued increase in global iron ore prices will see iron ore miners' sales and profitability improve.
Private sector steel producers had a good showing in the December quarter, as they benefited from higher output and realizations. Rising input costs are a risk. Also, domestic steel consumption continues to be low, at 4% in January, but output is rising at a faster rate. That gap is being made up by exports, which are typically less remunerative compared to domestic sales.
What should investors watch for?
China remains the main reason why iron ore and steel prices are trending firm. Any sudden policy changes by its government could reverse that effect. Other risks are usual, such as global economic growth and whether India's economic growth recovers to better levels in fiscal year 2018.